Scots face five more years of financial hardship

SCOTTISH households are facing five more years of economic misery due to soaring mortgage payments and a dramatic increase in the cost of living, a leading economist has warned.

The stark warning came as property experts said home-owners in Scotland were facing a massive hike in mortgage payments this year if an expected increase in interest rates was approved by the Bank of England.

Meanwhile, another report said that households would see their costs of living soar by more than £1,000 a year as prices rise at an “alarming rate” driven by soaring inflation.

Economist Professor David Bell of the University of Stirling said spiralling mortgage repayments, depressed wages and other increased costs of living could be a “permanent” fixture in Scotland for at least five years.

The eminent economist also warned that the perfect storm gripping Scotland’s economy would get worse before it got better, with the deep cuts in the public sector yet to bite.

Prof Bell said: “There’s no doubt that people’s living standards are dropping and this is due to a combination of things, which have their roots in the economic crisis.

“The question is whether the lower living standards are a permanent or temporary thing, but the one thing for sure is that it will be a long time before they are back to 2007 levels – the year before the economic crisis.

“The possibilities for growth are not that strong and I don’t see unemployment falling fast without that growth. The cuts in Scotland’s public sector will also affect unemployment and the economy.

“It will be four of five years before we get back the living standards of 2007. I can’t see any reasons for optimism and in the short run it doesn’t look good.

“Things will certainly get worse before they get better. A lot of it does depend on the interest rates, and if they increase by [one percentage point], than some people will see their mortgage repayments double.”

Meanwhile, market analysts expect interest rates to reach 1 per cent by the end of the year, as a Bank of England report warned that if the bank took no action, inflation would still be above target in two years’ time.

The report confirmed that inflation is expected to soar close to 5 per cent before falling to about the 2 per cent target in 2012 – but this was based on interest rates rising in line with market expectations, starting as early as the second quarter.

BoE Governor Mervyn King said: “It is clear that at some point Bank rate will have to go up.

“Anyone making long-term financial decisions should not expect the Bank rate to be at these low levels indefinitely.”

But he said the bank had not yet decided when rates would rise. “Some people are running ahead of themselves and saying that we are pre-announcing or laying the ground for a rate rise,” he said.

“That decision has not been taken and won’t be taken until we get to the next meeting, or the following meeting – it may be many quarters before we do anything.”

Speculation of an early rate rise mounted after Mr King said in a letter to Chancellor George Osborne that inflation was likely to return to target “on the assumption that Bank rate increases in line with market expectations”.

The letter was triggered after official figures revealed Consumer Prices Index (CPI) inflation leaped to 4 per cent in January –double the government’s target.

Howard Archer, chief UK and European economist, said the cautious tone of Mr King’s remarks indicated he was not convinced rates need to rise yet.

“The interest rate outlook remains very uncertain, and whether or not the Bank of England acts by May will depend on how well the economy performs over the coming weeks as the fiscal tightening really kicks in,” said Mr Archer.

“We fully acknowledge that a move is highly possible by May, but for the time being we are sticking with the view that the Bank of England will hold fire until the second half of the year.”

Simon Hayes, economist at Barclays Capital, said he expected the BoE to raise interest rates by a quarter of a percentage point in May, August and November, taking the rate to 1.25 per cent by the end of the year.

But he added: “Although we believe a May rate increase is a reasonable central view, uncertainty about the path of the policy rate remains unusually high.”

Mortgage experts told The Scotsman that families could face increased repayments on their home of as much as £100 a month if interests rates rose by one point by the end of the year.

David Marshall, mortgages expert at the Edinburgh Solicitors’ Property Centre, said: “If interest rates do go up there will be a direct impact on anyone who has a variable mortgage, as their payments will clearly be affected.

“There’s going to be increased pressure on mortgage repayments this year and people will be facing higher repayments.

“Only time will tell how much we’re talking about, but it’s not impossible to see some payments going up by more than £1,000 over the course of a year.”

A spokeswoman from the Council of Mortgage Lenders warned that the average household would be forced to find as much as £100 a month to cover the outstanding repayments on their homes.

She said: “If interest rates go up, people with variable mortgage rates will be affected. If someone has a £100,000 mortgage, a 1 per cent increase could see their repayments increase by £100 a month.

“It’s the sort of increase that could lead to some people finding that they are no longer able to cope financially.”

The growing concern over interest rate rises came as retirement income specialist MGM Advantage published a report warning that the typical UK household would need to spend an extra £1,360 a year to maintain their standard of living compared with this time last year.

Aston Goodey, sales and marketing director of report authors MGM Advantage said the study showed the price of goods continued to rise “at an alarming rate”.

A report from the body that monitors insolvency figures and public records of debt also warned of tough times ahead.

Malcolm Hurlston, chairman of the Registry Trust, said: “Scotland may still be in troubled waters. The extended period of cold weather affected Scotland more than other parts of the United Kingdom and budgets will no doubt be stretched.”

Scottish Conservative housing spokesman Alex Johnstone said: “Raising interest rates would depress demand and would only increase the pressure and costs for hard pressed families in Scotland.”